Quote of the Day

From Deirdre McCloskey, “The Faithful and Hopeful Economic Agent”:

[The political scientist James Q. Wilson] adopts the view of the Scottish Enlightenment, and the Aristotelian tradition before it, that ethics is a matter of habit and character, not continuous decisions under a rule of Reason.  Like other virtues, he argues, faith is behaviorally instilled, working in tandem with genetic predispositions.  Once instilled it is a feeling, a complaining conscience, what Smith called the Impartial Spectator.  That is why Hutcheson and Hume and Smith in 18^th-century Scotland claimed that virtues arose from “moral sentiments”: virtues are matters of a prepared feeling rather than a decision on the spot.

 

You begin, though, with a decision to cultivate the moral sentiments.  You enroll with a free will at Annapolis and train your ethical muscles.  Like a body trained to a sport, the present performance is both forward and backward looking, hopeful and faithful, both.  The rule of reason, by contrast, insists on disowning the past, extracting you from your history.  Utilitarianism insists on faithlessness.

The Remarkable Coase

In preparing for some upcoming classes on the Coase Theorem, I came across a few interesting tidbits that I’d seen before but I thought would be worth posting.

This, from George Stigler, on Coase’s ability to persuade some skeptical colleagues:

We strongly objected to this heresy. Milton Friedman did most of the talking, as usual. He also did much of the thinking, as usual. In the course of two hours of argument the vote went from twenty against and one for Coase to twenty-one for Coase. What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.

And the fraction of his total publications that have become true classics is astounding.  Just consider that two of his twelve notable papers – “The Nature of the Firm” and “The Problem of Social Cost” – are among the most well-known papers of the 20th century (and they used little or no mathematics – imagine that).

By the way, Coase is apparently still going strong at the ripe old age of 102.

Keynes on Moral Objections to Capitalism

In 1925, John Maynard Keynes wrote a little known piece in the Nation and Athenaeum in which he described how capitalism itself is threatened when people perceive there to be no justifiable reason for unequal rewards.  Capitalism, Keynes wrote, can become morally objectionable when it is reduced to “a mere congeries of possessors and pursuers.”

We don’t seem to be quite there – and, in fact, the conflicts between rich and poor seem to be abating – but the modern political rhetoric of class warfare cannot be helping much.

Quote of the Day

From Adam Smith’s Theory of Moral Sentiments:

We suffer more, it has already been observed, when we fall from a better to a worse situation, than we ever enjoy when we rise from a worse to a better. Security, therefore, is the first and the principal object of prudence. It is averse to expose our health, our fortune, our rank, or reputation, to any sort of hazard. It is rather cautious than enterprising, and more anxious to preserve the advantages which we already possess, than forward to prompt us to the acquisition of still greater advantages. The methods of improving our fortune, which it principally recommends to us, are those which expose to no loss or hazard; real knowledge and skill in our trade or profession, assiduity and industry in the exercise of it, frugality, and even some degree of parsimony, in all our expences.

On Macro History

The Economist recently posted a “Brief History of Macro: How we got here.”  It contains a link to a nifty graphic put together by Brunnermeier and Olivan of Princeton, which starts with Keynes.  While starting with Keynes makes perfect sense, there was plenty of important work on macroeconomic issues long before Keynes.

Among them was David Hume who developed a version of the quantity theory of money and worked on what would later become the Phillips curve.

Hayek argued that Hume (and Richard Cantillon) initiated the development of modern monetary economics, which is certainly a fair assessment.  Milton Friedman wrote this of Hume:

 

We have advanced beyond Hume in two respects only: first, we now have a more secure grasp on the quantitative magnitudes involved; second, we have gone one derivative beyond Hume.

Cantillon was also an impressive economist, introducing the concept of “Cantillon effects” and offering early insights into business cycles.  His Essay on the Nature of Commerce is available in its entirety here.

There were, of course, others.  The Physiocratic Tableau Economique was a depiction of the circular flow that is now so ubiquitous in elementary macroeconomics textbooks.  It can also be interpreted as a Leontief-type input-output model, as Ronald Meek explained here.

Keynes himself praised Malthus’ work on aggregate demand, and the important Ricardo-Malthus debates over underconsumption and  Say’s Law of Markets occurred in the early 19th century.  And, John Stuart Mill made important contributions to that debate later in the same century.

Gross Domestic “Transactions”

PRI recently ran a story featuring the work of Eric Zencey, a University of Vermont political scientist.  Zencey doesn’t like the concept of GDP as a measure of well-being, suggesting we rename it “gross domestic transactions.”  It’s not clear why it would matter if we replaced the word “product” with “transactions,” but there are deeper problems with Zencey’s logic than the name he prefers to use.

In justifying his renaming of GDP, he said:

“That’s all it is, it totes up the monetary value of all the transactions. And if it had that name that would help break the association people have with the idea that more GDP is better. It’s like hmmm, more transactions are better? Well it depends on what you’re transacting.”

Think about that for a moment – Zencey is wondering whether having more GDP (in other words, more income) is better (presumably against the alternative of having less).  He goes on to say that it does not ”measure the actual thing you’re trying to do, which is improve the living standards and well-being of people.”

There’s nothing wrong with trying measure other things like education or health, but Zencey seems to approach the issue from the assumption that there is something wrong with consumption (at least at modern levels).  It may well seem that way, but it is important to remember that vulgar levels of ostentatious consumption are nothing new.  One only has to read Veblen’s Theory of the Leisure Class to see that’s not the case (0r, McCloskey’s excellent recent book Bourgeios Dignity – she points out that the only thing new is that a vastly larger percentage of the population is now able to indulge in the vast vulgarities).

More importantly, GDP does measure the “living standards and well-being of people.”  People who are richer – those who live at higher levels of per capita GDP – have higher living standards.   They can afford the vulgarities of modern economies, yes, but they can also afford to consume more Beethoven symphonies and to donate to charities.  Circa 1800, the average person lived on around $3 per day (and this corrected for inflation).  As McCloskey notes,

“two centuries later the world supports more than six-and-a-half times more souls.  Yet contrary to a pessimistic ‘Malthusian’ belief  that population growth would be the big problem, the average person nowadays earns and consumes almost ten times more goods and services than in 18oo.”

Not only do they earn and consume so much more, but they live longer too.  So, no, GDP measures are not perfect but they certainly do measure the ‘thing we’re trying to do,’ which is to raise living standards.